Can a mutual fund SWP pay your home loan EMIs? 15 years of data says think again

Windfalls have a way of making us creative. An investor I know came into an unexpected inheritance while still servicing a home loan. A mutual fund distributor known to him put an interesting idea on the table: don’t rush to prepay and close your loan. Instead, park the money in an equity mutual fund, start a systematic withdrawal plan (SWP), and let it cover your equated monthly instalments (EMIs). The fund offers a 15% compound annual growth rate (CAGR), the loan costs you 8%—pocket the difference. On paper, it looked like a no-brainer. The math, though, tells a more complicated story.

Where the strategy starts to unravel

Before we get into the math, let us look at some bizarre assumptions this strategy makes. These assumptions, as we will see, also challenge how equity markets—and equity mutual funds—behave.
Linear equity returns: Markets are assumed to compound at a steady rate each year. In reality, equity returns are volatile and uneven.
Stable borrowing costs: Loan interest rates are assumed to remain unchanged over 15 years, which is rarely true in practice.

Ignored sequence of returns risk: The timing of returns is treated as irrelevant, though it is central to SWP sustainability.
Static investor behaviour: Models assume investors continue SWPs regardless of market conditions.
Income stability: The assumptions completely ignore an investor’s life, career, and family situation. A job loss, a medical emergency, or any disruption to income may force an investor to unwind the strategy at the worst possible time.
Life cover adequacy: If the investor dies with insufficient insurance coverage, the family inherits the liability. Prepaying the loan eliminates this risk entirely. Continuing it to chase market returns amplifies it.

These assumptions collectively create an overly optimistic outcome that rarely survives real-world volatility. When the strategy is tested against 15-year historical return cycles across multiple mutual fund categories (large cap, mid cap, hybrid, and large & mid cap), the outcome is far less favourable than commonly perceived.

Let us assume that the loan amount is Rs.1 crore, the loan tenure is 15 years, the interest rate is 8.75% per annum, and the total interest outgoings are Rs.79 lakh. The Rs.1 crore principal is irrelevant to the comparison; whether prepaid or invested, it’s deployed.

Think of it this way. If you prepay the loan, the Rs.1 crore is gone, but so is the loan. You pay zero interest from that point. If you invest instead, the Rs.1 crore stays in the market, but the bank keeps charging you interest for 15 years. That interest—Rs.79.82 lakh—is the price you pay for keeping your money invested. So the only way this strategy makes sense is if your fund corpus, after funding 181 monthly withdrawals, leaves you with more than Rs.79.82 lakh. Anything less, and you’d have been better off simply prepaying the loan on day one.

Observed outcomes

When the terminal corpus is measured against the total interest burden of Rs.79 lakh, the results are telling. In three of the four cases, the final corpus you’re left with is lower than your total interest outgo.

In the case of the large- and mid-cap fund, the corpus is exhausted prematurely, leaving unmet EMIs for nearly three years. Only the mid-cap fund produced a substantial gain, driven by an exceptional return period. That was the exception, not the rule.

Now, consider if this strategy had begun in January 2008. The net asset value (NAV) crash over the first 12-18 months would have forced the sale of far more units at depressed prices simply to fund the monthly EMI. Those units, once redeemed at the bottom, would never compound their way back. The damage to the portfolio would be far more, making the recovery harder.

This is the essence of sequence-of-returns risk. A fund’s 15-year XIRR (extended internal rate of return) is just an average. An SWP lives through every year of that average, including the bad ones. The loan, meanwhile, compounds relentlessly against the borrower.

What historical data actually shows

The behavioural dimension

Beyond mathematics, investor psychology plays a decisive role.

Most investors struggle as they watch their portfolio shrink while EMI obligations remain fixed. The temptation to stop the SWP or redeem the corpus becomes overwhelming. This introduces discretionary risk into what is assumed to be a systematic plan. Acting on it at the wrong time permanently locks in the loss.

An investor’s life situation also matters. Career uncertainty, changing income visibility or family responsibilities may make it difficult to continue the strategy over long periods.

Whom does this strategy suit?

In specific cases, high-net-worth investors for whom Rs.1 crore is not their core wealth, who are not dependent on this corpus for any of their critical goals, and whose EMIs are not tied to SWP performance, can consider this option.

For everyone else, the strategy demands far more than a return differential between equity and loan rates. It requires financial resilience, behavioural discipline and the ability to survive unfavourable market sequences.

Investors considering this approach should first understand the risks and assess their own financial circumstances and risk appetite. For the majority, though, prepayment is almost certainly the better choice, the one that the investor can live with over the long run with peace of mind.

The Author is Sebi Ria & Founder, Goalbridge